Serving the Customers:

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Topic 8-2
Marketing Management (MAR4803) By Kanghyun Yoon

• Serving the Customers
• Designing the Values II

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Issues To Be Discussed

• Lets consider the following issues to understand
  what the marketing management is.
• Issue 1 What are the roles or implications of
  price?
• The important concepts for this issue are .
• Issue 2 How to set the price?
• The important concepts for this issue are .

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Issue 1 What is the essence of a price?
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Understanding the Roles of Price

• Definition of price
• Consider the following examples of prices
• Rent for your apartment, tuition for your
  education, fee to your physician, fare for
  airline charge, commission for salesperson,
  interests charged by banks, premium by insurance
  company, and so on.
• What is the definition of the price? Is the price
  the amount of money charged for a product?
• The price is .
• Key underlying theories
• Price cues based on consumers perceptions.
• Price as the indicator of product quality.
• Reference price (i.e., internal and external RP)
  and mental accounting.
• The question is how to determine an appropriate
  level of the price?
• From fixed pricing strategy to dynamic pricing
  strategy.

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Issue 2 How to set the price?
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Setting the Price

• Consider the following six-step procedure for
  setting a price.
• Stage 1 Selecting the Pricing Objective.
• Consider various types of pricing objectives .
• Stage 2 Determining Demand.
• Estimate demand curves and the magnitude of
  consumers sensitivities to demand.
• Stage 3 Estimating Costs.
• Estimate types of costs and identify experience
  curve.
• Stage 4 Analyzing Competitors Costs, Prices,
  and Offers.
• Consider competitors values.
• Stage 5 Selecting a Pricing Method.
• Consider various types of pricing methods .
• Stage 6 Selecting the Final Price.
• Consider the impacts of other marketing
  activities.

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1. Selecting the Pricing Objective
Survival Low Prices to Cover Variable Costs
and Some Fixed Costs to Stay in Business.
Current Profit Maximization Choose the Price
that Produces the Maximum Current Profit, Cash
Flow or ROI.
Marketing Objectives
Market Share Leadership Low as Possible Prices to
Become the Market Share Leader.
Product Quality Leadership High Prices to Cover
Higher Performance Quality.
Other Objectives Various Types of Pricing
Objectives for Nonprofit or Public Organizations.
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Monopolistic Competition Many Buyers and Sellers
Trading Over a Range of Prices.
Pure Competition Many Buyers and Sellers
Who Have Little Affect on the Price.
2. Determining Demand
Different Types of Markets
Oligopolistic Competition Few Sellers Each
Sensitive to Others Pricing/ Marketing
Strategies
Pure Monopoly Single Seller
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2. Determining Demand
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3. Estimating Costs

• Total Costs
• Sum of the Fixed and Variable Costs for a Given
• Level of Production

Fixed Costs (Overhead) Costs that dont vary
with sales or production levels. Executive
Salaries Rent
Variable Costs Costs that do vary directly
with the level of production. Raw materials
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The Experience Curve
Tries to Determine the Price based on the
Experience or Learning Curve
Current Price
Experience Curve
Cost per Unit
Accumulated Production
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5. Selecting a Pricing Method

• What kinds of pricing methods can be considered?
• Cost-Based Pricing
• Markup pricing
• Break-even or target-return (target-profit)
  pricing.
• Value-Based Pricing
• Perceived-value pricing.
• Value pricing
• Competition-Based Pricing
• Going-rate pricing.
• Dynamic Pricing
• Bid-based or auction-type pricing.

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Cost-Plus Pricing
Adding a Standard Markup to the Cost of the
Product
Sellers Are More Certain About Costs Than
Demand
Minimizes Price Competition
Perceived Fairness to Both Buyers and Sellers
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Target Return (Profit) Pricing
Tries to Determine the Price at Which a Firm
Will Break Even or Make a Target Profit
Total Revenue
Cost in Dollars (thousands)
Target Profit (200,000)
Total Cost
Fixed Cost
Sales Volume in Units (thousands)
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Value-Based Pricing
Cost-Based Pricing
Value-Based Pricing
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Setting Prices
Competition-Based Pricing
Going-Rate Company Sets Prices Based on
What Competitors Are Charging.
Sealed-Bid Company Sets Prices Based on What
They Think Competitors Will Charge.
?
?
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Dynamic Pricing Strategy
English Auction Price is ascending as bidders
submit own bids
Dutch Auction Price is descending as bidders
submit own bids
First-Price Sealed-Bid Auction Among sealed bids
submitted, the highest wins
Online Auction Pricing Strategies
Second-Price Sealed-Bid Auction Among sealed bids
submitted, the highest wins
Group Buying Auction As more bidders join, the
price decreases.
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6. Selecting the Final Price

• What types of pricing strategies are popular?
• Fixed Pricing Strategies
• Setting one price for all buyers.
• Examples Price leadership strategy and
  promotional strategy, etc.
• Segmented Pricing Strategies
• Charging different prices for different
  customers.
• Examples Segmented pricing such as geographic
  and value pricing, etc.
• Dynamic or Negotiated Pricing Strategies
• Charging different prices for individual
  customers.
• Examples online auctions, name your own price,
  demand aggregator, etc.
• Bartering
• Barter.
• Pricing Strategies for Information Goods
• Considering the cost structure of information
  goods.

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Pricing Strategies for Info Goods

• Cost structure of information goods
• First-Degree Price Discrimination
• The firm sells different units of the product for
  different prices and these prices may differ from
  consumer to consumer.
• It is known as perfect price discrimination.
• Second-Degree Price Discrimination
• The firm sells different units of a product for
  different prices, but every individual who buys
  the same amount of the product pays the same
  price.
• One example is quantity discount.
• Third-Degree Price Discrimination
• The firm sells the product to different people
  for different prices, but every unit of product
  sold to a given individual sells for the same
  price.
• Examples are senior citizens discount, student
  discount.

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Examples of Pricing Strategies
Product Line Pricing Setting Price Steps Between
Product Line Items i.e. 299, 399
Optional-Product Pricing Pricing Optional or
Accessory Products Sold With The Main
Product i.e. Car Options
Captive-Product Pricing Pricing Products That
Must Be Used With The Main Product i.e. Razor
Blades, Film, Software
By-Product Pricing Pricing Low-Value By-Products
To Get Rid of Them i.e. Lumber Mills, Zoos
Traditional Pricing Strategies
Product-Bundle Pricing Pricing Bundles Of
Products Sold Together i.e. Season Tickets,
Computer Makers
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Examples of Pricing Strategies
Psychological Pricing
Promotional Pricing

• Adjusting Prices for Psychological
• Effect.
• Price Used as a Quality Indicator.

Geographical Pricing

• Temporarily Reducing Prices to
• Increase Short-Run Sales.
• i.e. Loss Leaders, Special-Events

International Pricing

• Adjusting Prices to Account for the
• Geographic Location of Customers.
• i.e. FOB-Origin, Uniform-Delivered,
• Zone Pricing, Basing-Point,
• Freight-Absorption.
• Adjusting Prices for International
• Markets.
• Price Depends on Costs, Consumers,
• Economic Conditions Other Factors.

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Examples of Pricing Strategies
Traditional Pricing Strategies
Segmented Adjusting Prices to Allow for
Differences in Customers, Products, or Locations.
Discount Allowance Reducing Prices to
Reward Customer Responses such as Paying Early or
Promoting the Product.
Cash Discount
Customer
Quantity Discount
Product Form
Functional Discount
Location
Seasonal Discount
Time
Trade-In Allowance
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Pricing Strategies for Info Goods
Versioning A form of second-degree price
discrimination i.e. Premium and Economy
Micro-Money
Bundling Many information goods are sold in large
bundles i.e. Music files in an album, MS Office
Fixed-Fee Pricing Giving customers unlimited
usage for a flat fee i.e. ABI Inform Database by
UCF
Other Pricing Strategies Using first-degree price
discrimination i.e. Online auctions
Pricing Strategies for Information Goods
Other Pricing Strategies Using third-degree price
discrimination i.e. Group pricing for software
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Reference

• Ferrell, O. C. and Michael D. Hartline (2008),
  Marketing Strategy, 4th ed., Thomson
  South-Western, Ohio.
• Hanson, Ward (2000), Principles of Internet
  Marketing, South-Western College Publishing,
  Ohio.
• Kotler, Philip and Gary Armstrong (2004),
  Principles of Marketing, 10th ed., Prentice Hall.
• Kotler, Philip and Kevin Lane Keller (2007), A
  Framework for Marketing Management, 3rd ed.,
  Pearson Prentice-Hall, New Jersey.
• Kotler, Philip and Kevin Lane Keller (2007),
  Marketing Management, 12th ed., Pearson
  Prentice-Hall, New Jersey.
• Lehmann, Donald R. and Russell S. Winer (2005),
  Analysis for Marketing Planning, 6th ed.,
  McGraw-Hill, Boston.
• Siegel, Carolyn (2006), Internet Marketing
  Foundations Applications, 2nd ed., Houghton
  Mifflin, New York.
• Winer, Russell S. (2007), Marketing Management,
  3rd ed., Pearson Prentice-Hall, New Jersey.